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The Government Must Resist Micro-Managing Our EU Exit

Unlike many commentators, I believe that a no-deal Brexit still
very possible.

It is the default as the clock ticks, and parliament must vote
for government-backed legislation to change path.

For all the threats about a second referendum, the Conservatives
would implode if they rowed back on delivering Brexit. And as
regrettable as a no-deal scenario might be, it seems the only way
of achieving a meaningful Brexit.

Yes, adjustment will be
disruptive. It requires an active government to prepare. But
markets respond quickly in the face of necessity.

But Brexiteers who consider this option the best path forward
should admit that it would come with short-term dislocation, and
prepare the country for it.

The effect here would not be “uncertainty”. No-deal
provides clarity relative to the chaos of Theresa May’s
proposed withdrawal agreement or a second referendum.

Rather, the impact would be practical disruptions as we shift
towards a new trading environment.

The visible effect widely discussed is at ports. Critics argue
that delays caused by physical customs, administration, and
regulatory checks will slow down the rate of vehicle pass-through.
This could cause ferry and ship delays, in effect reducing
capacity, mainly between Dover and Calais.

Some at HMRC envisage far less disruption than Downing
Street’s apocalyptic tales, and Tim Morris, chief executive
at the UK Major Ports Group, has rubbished the idea that “the
Dover effect” will occur elsewhere. But it seems reasonable
to expect an early impact.

The government must therefore be clear on what environment for
cross-border trade it envisages — not just on regulations (it
has largely said that it will accept all EU goods as before), but
on tariffs, and whether it will apply a tariff-free environment to
all goods worldwide under WTO law.

This move towards unilateral free trade would helpfully offset
some of the economic costs of more trade barriers with the EU,
mitigating the Brexit trade disruption which politicians and
commentators seem to fear so greatly.

A no-deal Brexit would be a near-term negative supply shock,
like the disruption caused by sustained adverse weather. Delays
naturally drive up shipping prices, in turn raising prices of
shipped goods while changing relative prices between them.

These rising costs are, of course, not good for the economy. But
markets are remarkably adept and self-correcting, helping to
alleviate queuing and shortages.

Firms which ship goods would have to reassess their willingness
to pay. That helps ration space towards producers which judge that
they can still profitably reach market.

Similar decisions are made at the individual level. A rise in
the price of imported Spanish tomatoes, for example, may shift
demand and encourage consumers to buy more British carrots.

But, dynamically, higher shipping prices also incentivise more
ferries or container ships to serve the UK market, using ports
where capacity is available.

There may be practical difficulties to changing routes, and
questions of the suitability of ports (some are designed for
load-on, load-off container ships rather than roll-on, roll-off
ferries). But one could envisage new trade routes into other ports
such as Hull, Liverpool, Ramsgate, Immingham, and Sheerness.

In time, producers might also adjust product ingredients so that
they are less perishable in the face of some longer journeys. Other
sellers might be encouraged, at the margin, to transport goods by
air or train, or relocate activity to the UK.

Government planning of which goods should get carried on ships
distorts these adjustments. It also encourages special
pleading.

What starts with guarantees on medicines and water chemicals
would soon see a plethora of industries lobbying for privileges.
Ministries would be under pressure to grant favours to everyone
from the car industry to food suppliers.

This could harm competition too: large firms would be better
positioned to make these demands than their smaller rivals.

Already, ministers muse patronisingly about deciding between
space for French paté or German gearboxes. But consumers and
producers should determine priorities, not ministers. The
government wading in is guaranteed to ensure shortages of some
highly-demanded products.

Ministers must resist their interventionist urges. Yes,
adjustment will be disruptive. It requires an active government to
prepare. But markets respond quickly in the face of necessity.

The government’s focus should not be on planning what
trade occurs, but minimising trade barriers faced by all where it
can.